Sound financial management is crucial to the success of your operation. The following tools and considerations are intended to guide those new to nonprofit finances, whether you are starting a nonprofit or a start nonprofit.
Depending on the scope of your activities and the size of your project, these tools will vary in complexity.
Financial ethical conscience
A financial role entails various responsibilities, of which the most important is to safeguard a project’s assets. Those responsible for finances must maintain impeccable moral conduct and remember that the first priority of the role is to keep the mission of the project at the forefront of all you do.
An efficient financial system will allow you to track your organizational resources, typically known as your assets. The fact that you owe a commitment to various stakeholders, which may include donors, governments, and people you are serving, among others, obliges you to monitor and keep control of your assets.
A few basic elements of a sound financial system includes:
- A set of policies establishing transparency and accountability
- A basic procedure manual that includes financial processes to promote internal controls over key operational processes
- A simple system for financial reporting. A spreadsheet laying out a financial reporting system will enable you to easily sync the different type of controls and information you would like to capture. As a general rule, your spreadsheet should allow you to maintain controls to ensure that the information being reported is synchronized and reconciled. Using this system, as recommended, would ensure that all transactions are recorded correctly and all your balances match actual existing assets.
- Bookkeeping and Bank Reconciliation Template
- Bookkeeping and Bank Reconciliation Training Video
Evaluation of programs
Good evaluation of programs ensures that programing decisions are translated into budget line items – expenses and revenues. Programming in financial planning is deciding which activities to engage in and how much in resources each activity will receive. The reality is that some programs grow faster than others, or new programs are added as your organization grows, whichever way the organization grows, each activity must be presented on their respective line items, so comparisons across programs can be made, tracked, and evaluated. In the past, nonprofit financial management was limited to a one-year budgeting process, but for long-term planning you should have at least a three-year budget plan.
Fundraising planning and evaluation
Fundraising is a crucial, if not the most important, aspect of nonprofit operations, and it requires investment. Once your organization has embraced a fundraising culture, fundraising itself will become another budget line item. The more revenue you want, the more you would invest in fundraising.
Preservation of assets
The preservation of assets has a specific meaning from a nonprofit financial perspective where liquidity is the key driving factor in preservation of assets. Your current assets are the most liquid of your assets, and these include any high value items such as cash, investments, receivables, and so on. Being liquid will allow the organization to make faster strategic decisions and avoid running with debt. At the end of your first fiscal year, after you have paid all your expenditures, remaining funds should carry over to your Net Assets. Net Assets are important because they show the financial health of your organization at any given time.
The tools described here emphasize the importance of liquidity. Liquidity should be the most important financial objective of the organization. It is likely that at times your organization will need to search for other sources of funding, such as loans or lines of credit. Although, not recommended at the beginning of any start-up project, opting for loans or lines of credit may be necessary, as long as this move was part of the strategic and long term financial plan, reflected in the long term budget. The goal should be to procure some short term financial assets to bridge the gap between donor funding sources.
Nonprofit organizations owe a moral obligation to their founders and usually to the government of the country in which they are registered. This means that these actors can request from you financial reports to verify that funding was used in responsible ways. At any point in time, your financial reports should resemble actual financial activity, and these reports must be complete and verifiable.
In any area of work, problems arise from a lack of communication. If you are in charge of managing your organization’s finances, it is important to note that your colleagues will not often be literate in financial terms and procedures. Neither are these easy to explain to those without a financial background. One major responsibility will be to communicate in a manner that your stakeholders can understand, in order to help them understand the reasons behind financial reporting and internal controls. Communicate your goals, problems, and concerns. Remember, strategic decisions will be made based on the financial information you will be providing to program managers.